Every lawyer should make a financial plan for retirement. Certainly there are caveats, as the lingering effects of the Great Recession make some lawyers fear that they cannot afford to retire.
But that's no excuse for ignoring significant practice-related financial issues that are important to address, no matter when you plan to retire.
Furthermore, the financial aspects of a potential retirement differ for lawyers depending on firm size. Ask yourself — and be sure you are able to answer — the following questions.
- For large-firm lawyers:
Are your finances strong enough to handle de-equitization?
Forced retirement of older partners continues at many firms, and often those lawyers have not saved enough to afford retirement as their standard of living has increased over the years to match their income.
And savings are not the only concern; you must know whether you will be able to get any equity out of your firm if you are terminated and, if so, how the price for your equity share will be set.
Have you read your partnership agreement?
Lawyers nearing retirement age at any large firm should know if their agreement includes severance and their share of receivables if they leave involuntarily.
If retirement is voluntary, be certain to investigate whether there are only certain times of the year (for example, your anniversary date or the last day of the fiscal year) when you can leave and get your full investment back.
What is the status of your pension?
Judging from recent news reports, it appears that a number of the country's largest firms have pension plans that are unfunded. In other words, these firms have pension plans, but not enough money to pay the obligations of those plans as their lawyers retire.
Be wary in such situations that younger partners may torpedo the existing firm and its pension obligations to create a new firm with no obligations.
- For small-firm lawyers:
Do you have an estate plan?
Having life insurance and a disability policy is a prudent step for any sole practitioner. Other requisite elements include a will and estate plan that make legitimate application of all the advantages allowed under law.
The plan can estimate and minimize estate tax-liability exposure, create trusts to conserve assets and minimize tax impact, provide financially for all the expenses necessary to close a practice, and properly value the practice for estate tax purposes.
Does your practice have an estate plan?
Every lawyer should take the possibility of his untimely death or disability into account when planning a practice's future. Failure to plan for how clients will be taken care of in the event of death can be construed as reckless disregard for client welfare.
Many state bar associations in such instances will appoint a receiver to wind up the practice, and the lawyer's estate will be liable for the cost.
Do you know what your practice is worth?
Every firm represents an investment of years of hard work and financial resources in growing the practice and building goodwill. A vibrant client base and strong professional reputation are real assets that have financial value, especially if the practice is sold.
Lawyers who have not assessed that value are throwing it away, relinquishing their life's work without getting anything in return.